The First Step for a Truly Hopeful Tax Reform Plan for Oregon

November 29, 2006By Chuck Sheketoff

As strange as it may seem, a number of Oregon legislators are seriously discussing providing a windfall to wealthy people like Phil Knight. They want to tax unearned income from the sale of stock at lower rates than the tax on the earned income of ordinary Oregonians.

Ironically, this would mean that the secretaries who complete the paperwork for stock trades would pay income taxes at a higher rate than the well-to-do would pay on their increases in wealth from the stock sales.

Mr. Knight is listed in Forbes as the 70th wealthiest person in the world. This past year, he sold about $1 billion worth of stock in his company, Nike. That’s a lot of money. As the state economist has noted, if one assumes it was all taxable, Mr. Knight alone pushed Oregon’s income tax on wealth up 22 percent! And who knows what additional income from wealth he cashed in from other holdings this past year?

Oregon’s income tax code treats income from work, and income from wealth, the same. For both, the tax rate is 5, 7, or 9 percent. While proponents of the new taxing scheme like to say Oregon has a capital gains tax, in reality we have no special tax on capital gains. All income – from work and from wealth creation including the sale of stock – is treated equally for tax purposes.

One plan, sold as the “Hopeful Plan for Tax Reform,” would reduce Mr. Knight’s tax on his unearned income by 55 percent, and would lower the income tax on his earned income by about 45 percent.

Do Mr. Knight and his friends need that type of tax cut?

From 1980 to 2004, the top one-tenth of one percent of Oregon households saw their average adjusted gross income nearly quadruple, rising from $733,000 in inflation-adjusted dollars to $2.6 million. As the economy grew from the last half of 2003 to the last half of 2005, the highest-paid workers got all of the real earnings gains. Unfortunately, low- and middle-pay workers saw their earnings fall relative to inflation during this time.

The proponents of this new tax scheme wrongly suggest that Oregon’s economy would benefit from slashing the taxes of Mr. Knight and others in the highest income brackets. Proponents do not acknowledge that the economy is already strong and the wealthiest among us are reaping all the benefits, while most Oregonians are still not getting ahead. Moreover, careful studies of the effects of lowering the income tax on capital gains have shown no, or very little, economic benefit.

Oregon needs public policies and public structures that will channel more of the economy’s benefits to middle- and low-income families who are struggling. Oregon does not need tax policies and practices that exacerbate current inequities.

The Phil Knights of Oregon – those Oregonians with significant unearned income – are not struggling with the high cost of health insurance, high consumer debt, bankruptcy, or with the cost of higher education for their children. They aren’t pressured to take out payday or car title loans when hit with an unexpected expense. They don’t have to choose between paying the rent and buying healthy food. And none of these difficult circumstances are relieved by giving Mr. Knight and other wealthy individuals big tax windfalls that rob the state of important resources to support public structures.

The Legislature can gain public confidence by drawing a line in the sand on crazy ideas like reducing taxes for the wealthiest Oregonians who have benefited the most from economic growth. That line would be the start to a truly hopeful plan for tax reform.